Fast little loans
It is time for the financial services industry to stop turning a blind eye to the problems it has created in the savings industry. The responses of some of the major players to the release this week by National Treasury of a discussion paper on “Strengthening Retirement Savings” have been disappointing yet predictable.
The responses have focused mainly on the low level of savings among South Africans. The responses have not dealt frankly with the fact that National Treasury points an accusing finger at the financial services industry for being a significant part of the problem.
The contribution of the industry includes selling high-cost and opaque products and offering perverse incentives to product floggers to persuade you to sign up – and you discover only years later that you have been sold expensive junk.
Nowhere in the responses can I find any real commitment to providing better, cheaper products that best serve your interests rather than company profits and excessive executive remuneration.
The points made by National Treasury are not really new. Most South Africans have experienced the high-cost, poorly structured products provided by the financial services industry. And then there was:
* The proof provided by independent actuary Rob Rusconi back in 2004, when he exposed the high costs of the life assurance industry’s retirement products; and
* The row over determinations by former Pension Funds Adjudicator (PFA) Vuyani Ngalwana, who ruled that the confiscatory penalties the life industry levied on its clients when they could not afford to maintain their contributions were unacceptable. The life industry had Ngalwana’s determinations overturned in the High Court. But former finance minister Trevor Manuel intervened and in effect levied a R3-billion fine on the industry. He also ordered the start of a process that saw the penalties at first reduced from a potential 100 percent of your savings to 40 percent and then to 20 percent. And even then, with egg all over its collective face, some of the major life companies attempted to side-step the agreement the industry had reached with Manuel.
The life assurance industry has not instituted any significant reforms on its own initiative. In fact, it continues to sell opaque products with contracts that favour their profits (and executive pay packets) and to offer perverse incentives to product floggers, knowing full well that the products are not in your best interests.
Over the past number of months, I have asked executives in the life assurance industry why they continue to sell these high-cost, opaque savings products using perverse incentives that result in many financial advisers acting in the interests of themselves and the product providers.
The reason for the question is the proposed launch of a new form of regulation called Treating Customers Fairly (TCF). It is principle-based, rather than rule-based. In terms of TCF, product providers have to be able to demonstrate that they have treated you fairly when designing products, selling them to you and providing proper after-sales service.
The life companies claim the controversial, costly products they sell pass muster, but they cannot demonstrate why someone seeking to provide for his or her retirement should be signed up to a lengthy contract that commits him or her to pay Rx every month but then be docked a potential 20 percent of his or her savings when, due to one of life’s misfortunes, he or she cannot afford to maintain the premiums.
Earlier this year, the Financial Services Board (FSB) released details of the results of a TCF pilot project involving 20 financial services companies that hold more than 200 different FSB licences.
The report on the trial run concluded that although South Africa’s financial services companies may think they are treating you fairly, they are often way off the mark – even misunderstanding what it means to treat customers fairly and what it will take for them to deal with you properly.
Although the FSB used gentler language, in effect the report says that financial services companies have become so used to ripping off their customers that they do not know they are doing it.
What makes this far worse is the way in which major companies continue to challenge the authority of various ombud schemes established by government to protect consumers and their savings.
Acting PFA Elmarie de la Rey says that despite High Court rulings in favour of her office, life assurance companies continue to challenge her authority when dealing with complaints.
And on July 30, short-term insurer Santam will provide and finance a high-powered legal team to challenge in the Pretoria High Court the right of financial advice ombud Noluntu Bam to issue determinations and order compensation against financial advisers.
Santam, through one of its agencies, provided professional indemnity insurance to an adviser, Deeb Risk, who, according to Bam’s determinations, sold elderly pensioners high-risk investments in property syndications that have collapsed, leaving the pensioners facing destitution.
The shocking new information out of National Treasury this week is that the life assurance industry is not the only guilty party: new-generation retirement annuity products provided by the broader financial services industry on linked-investment services provider administrative platforms are also horrendously expensive.
The high cost of savings products had Finance Minister Pravin Gordhan saying this week that the financial services industry should remember that the main beneficiary of your savings should be you – not some over-paid executive or asset manager.
He listed a number of areas where he wants to see reforms, particularly with regard to costs and product design.
At a press conference held to release National Treasury’s plans, Gordhan was asked whether he is declaring war on the financial services industry. Gordhan replied that it is not a declaration of war; he is seeking to achieve change through discussion and negotiation.
The problem is that so far the reforms sought by government have had to be forced on the industry; the industry has shown little willingness to reform itself. In fact, it has resisted the reforms by attempting to find its way around the spirit of legislation. Instead, companies look for loopholes that allow them to beat up their own customers, or they roll out their armies of corporate lawyers to deal with dissatisfied customers.
One way or another, changes are needed.